I am the founder and CEO of CircleUp, an accredited investor crowdfunding platform focused on consumer and retail companies. Before I started CircleUp, I worked in consumer-focused private equity at TSG Consumer Partners and Encore Consumer Capital. My experience in private equity exposed me to many great consumer and retail businesses that were too small to obtain funding through the traditional private equity channels. I created CircleUp to open up these investment opportunities to more investors, helping the best of these businesses gain access to capital while lowering the cost of investment for individual and small institutional investors. I received my MBA from Stanford and BA from Duke. I also hold Series 24, 63, and 82 licenses. You can connect with me through http://www.facebook.com/CircleUp.

10 Things An Investor Must Do Before Investing

Investing in private companies is not easy. These are risky, illiquid, long-term investments, so you need to do a lot of work upfront to increase your odds of success. I’ve spent my entire career either investing into private companies or helping investors and companies connect through an online investing platform. In my experience, here are 10 things investors must to before investing:

1) Talk with the CEO. When we first launched our equity crowdfunding platform, I was amazed that some online platforms were selling large chunks of pre-IPO Facebook shares, without providing investors access to the company’s financials or the opportunity to speak with CEO Mark Zuckerberg. You really should not invest in a private company without first talking to the CEO. How can you bet on the team if you haven’t talked with them? This is why we facilitate conversations through conference calls and our online forums. Speaking with the CEO will give you invaluable insights into leadership’s vision and ability to execute.

Do you share the vision and values of the CEO of the company? Reading about a company can never be as valuable as a conversation with the CEO. A friend of mine once heard an impassioned pitch from a CEO who had an intriguing company, but he spoke in militaristic metaphors about the marketplace as a battleground and the need to defeat competitors. His approach toward his market and his appeal to investors on military terms was off-putting. Prospective angel investors would never have known that had they not talked to him face-to-face.

Can the CEO and leadership team execute their vision? There are plenty of great business concepts and product ideas out there. It is in the execution phase where most companies stumble. You have to talk to a CEO to truly understand the risks associated with execution and to decide if you believe in the company and the CEO’s ability to deliver results.

2) Have a Diversification Strategy (and execute on it). It’s unlikely you will be a successful private investorinvestor if you’re putting money in just two or three companies. Data from the Kauffman Foundation suggests a sound approach is to have seven to 10 investments. The Angel Investment Performance Project, released by the Kauffman Foundation, found that angel investors generally had nine years of experience and averaged just over one investment per year. You need to determine how much you want to allocate to this asset class and then diversify your investments to reduce risk and increase your odds of success.

3) Talk to an expert. Find someone who knows the industry that interests you. I would recommend consulting a professional investor in the space or an investment banker focused on the category. Don’t know one? Start looking on LinkedIn – spending a few hours networking will help you realize there were questions you didn’t know you should ask.

4) Talk to customers. The more customer data you can get, the better. At a minimum, you should talk to three to five customers who use the product. You want to understand from first-hand users what’s to like about the product and what void does it fill. Is there an alternative product that customers say they would consider using in place of the product? Why or why not? What if a competitor drops prices—would they remain loyal? Most importantly, would they recommend the product? Customers come in three flavors: promoters who are loyal, will recommend a company’s products and services, and can help fuel growth; passives who are indifferent and easy pickings for competitors; and detractors who are unhappy and actively criticize. (In an ideal world you would do a Net Promoter Score survey, but that may not be realistic in every situation). Pay attention to the types of customers a company has; it’s a good sign if you hear them actually promoting the products they’re using.

5) Understand growth. How is the company growing and how will it continue to grow? Has the business grown by acquiring distribution or has it been successful increasing sales at the same stores? Organic growth (read: same store sales growth) is far more valuable than buying growth. Obviously, to understand growth, an investor has to dig into the key financial statements—the balance sheet, income statement, and cash-flow statement. In the consumer sector you can ask for retail level sales (i.e. SPINs data) to help answer that question.

6) Know the exit strategy. Know the exit scenarios for the industry that interests you. How big will the business need to be, and with what margins, to go public or be an attractive acquisition target? If an IPO is not in its future, who are potential buyers when it reaches that ideal scale?

In consumer and retail, IPOs are more rare than tech, so at CircleUp we always ask: “Who will buy this business in 5 years?” M&A is actually more common in consumer than in other industries. The value of M&A in the consumer space was nearly double the value of Internet and software deals in 2012, according to the most recent year-in-review data from PriceWaterhouseCoopers LLP.

7) Talk with your lawyer. Legal documents associated with investing in private companies are complicated. Show every document to your lawyer for feedback. You may not care about all of your lawyer’s points, but you should understand them.

8) Understand the business. Follow Peter Lynch’s investment maxim “Invest in what you know.” Before investing in a company, use the product, study the business. Lynch invested in Hanes in the early 1970s because his wife liked its L’Eggs pantyhose line. The better you understand the business, the more confident you’ll feel about your investment. Why would you invest in a tech company if you don’t have a tech background? Do you understand how to diligence the next hot mobile app or the technology trends that will impact it? Stick to what you know well.

9) Calculate the per unit economics. Amazingly, many companies in recent years have attracted investors despite the fact that they lose money on each “unit” they sell. Sadly for their investors, many of these companies also have no plan to change that situation. If you’re investing in a beverage company, you should understand how much it makes—or loses—on each bottle. The formula is simple: revenue minus full costs, including marketing and distribution costs.

10) Know the deal. Determine how a company’s valuation and deal structure stacks up against others in the industry. Look at the valuation relative to comparable companies based on multiple factors, including revenue, net income, growth rate, risk profile and capital structure. Good companies are not always good investments—especially if the valuation is too high. As Warren Buffett once said, “Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.”

Because we’ve had over a thousand companies apply to my equity crowdfunding site, we’re in a unique position to help provide data that investors need to benchmark consumer-goods companies against their peers. That’s a good start but the key is to do your diligence. Ultimately, any investor needs to obtain as much information as possible about the business, the industry and the deal. There are no sure bets, but the more you know, the better your odds of success.

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